BrokerDealers To Trade For Free in IEX Stock Exchange Proposal: The Death of Dark Pools?

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As reported by Bradley Hope in today’s WSJ, upstart equities trading venue IEX, the “dark-pool buster” profiled in the Michael Lewis book “Flash Boys,” announced today a new market structure scheme that would provide commission-free execution for orders submitted by brokerdealers.

According to the proposal, which is “expected to be submitted imminently” to the U.S. Securities and Exchange Commission in connection with IEX’s plan to move from its current status as an ECN (electronic communications network) and towards becoming a full-blown stock exchange, broker-dealer orders would receive priority in the IEX order book, meaning those orders would jump to the top of the order book if the price to buy or sell a stock was at least equal to the prevailing orders entered by non broker-dealers aka buy-side investors that include high-frequency trading firms, mutual fund firms and retail investors. In addition to brokerdealer orders being provided priority over other same-priced orders sent to the platform by non BD’s, broker-dealers would be able to execute commission-free.

In a move that is purposefully intended to disrupt the current market structure status quo and challenge the viability of loosely-regulated and so-called “dark pools,” in which pricing transparency is purposefully hidden so as to mitigate gaming of orders submitted by large institutions, IEX is embracing an approach that has become widely-embraced in Canada’s equity marketplace, whose primary equities trading is administered by TMX Group, that country’s largest stock-exchange provider. Noted TMX Group CEO Thomas Kloet, “The virtue of having more bids and asks consolidated in a few order books, rather than scattered across dozens of venues [such as what takes place in US markets) makes markets more transparent and provides for greater price efficiency.”

The IEX proposal comes close on the heels of recent events in which dark-pool operators have been accused by regulators and law enforcement agencies of various charges, including accusations filed against Barclays PLC by New York State Attorney General which alleges Barclay’s misleads its clients about the way its dark pool favors high-tech “high frequency traders.” Barclay’s system “Barclays LX” was the industry’s largest dark pool used by a broad universe of investors and competing banks, until those charges were filed last month. Since that time, Barclay’s has supposedly experienced a large exodus of clients using their platform, presumably because of concerns they too will be on the receiving end of New York AG subpoenas.

 

 

 

Jobs Available: Wall Street Scrambles to Hire Next Gen BrokerDealers

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BrokerDealer.com blog post courtesy of extract from July 5 story from The New York Times

nytimes logoA battle is raging on Wall Street as never before, with powerful factions scrambling for control of a precious resource.

On one side are the giant investment banks and broker-dealers, with names like Morgan Stanley and Goldman Sachs. Lined up against them, but also warring among themselves, are the giants of private equity — Kohlberg Kravis Roberts, Apollo Global Management and the Blackstone Group, to name just three. And the private-equity firms just happen to be the banks’ clients.

The prize they are fighting for is young talent.

This summer, dozens of junior bankers in their early to mid-20s will start jobs in private equity after spending their first two years out of college working at investment banks. Private-equity firms use billions of dollars of cash and plenty of debt to buy entire companies. They are seen by many young strivers as the next rung on an elite career ladder, promising higher status and more pay — around $300,000 a year, including salary and bonus, roughly double what a second-year banker might earn at Goldman.

But for junior bankers, who are known as analysts, securing such a job means stepping into the middle of a Wall Street struggle that has intensified since the financial crisis.

For the full story, please click here.

Two brokers who claim Morgan Stanley misled them win back $5M arb award

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BrokerDealer.com/blog update courtesy of extracts from InvestmentNews.com

An appeals court has upheld an arbitration award of nearly $5 million for two brokers who claimed Morgan Stanley misled them during the firm’s recruiting process.

A panel of appellate court judges in California unanimously overturned an earlier ruling in the Superior Court of San Diego County that had vacated the award. In the third decision rendered in the case, the Court of Appeal reinstated the award, denying Morgan Stanley’s claims that a potentially biased arbitrator had interfered with the case.

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“Although we conclude the arbitrator failed to make certain disclosures, these undisclosed facts could not cause an objective observer to doubt the arbitrator’s impartiality,” wrote Judge Richard Huffman, in the opinion.

A spokeswoman for Morgan Stanley, Christine Jockle, said the firm disagrees and is still considering how to proceed after the ruling, which was issued Monday.

A lower court had originally vacated the award after Morgan Stanley argued that the industry arbitrator on the panel, who was a broker at a regional firm, failed to disclose his in-laws’ ties to Morgan Stanley and the fact that his daughter allegedly had a brokerage account with Morgan Stanley.

But the appeals court disregarded the notion that any account she had at Morgan Stanley would have had an impact either way on her father’s decision in the matter.

Mr. Huffman also denied the claims that the same arbitrator was biased against Morgan Stanley because the wirehouse recruited a son-in-law who worked at the same firm as the arbitrator. It tried to recruit a second son-in-law but was unsuccessful. Mr. Huffman wrote that Morgan Stanley was aware of those instances before the arbitration began.

“Morgan Stanley was aware of all the allegedly undisclosed facts prior to the subject arbitration,” he wrote. “These undisclosed facts could not cause an objective observer to doubt the arbitrator’s impartiality.”

Mr. Huffman called the firm’s argument “counterintuitive and speculative,” and noted that Morgan Stanley had asked the same allegedly biased arbitrator to sit on a panel in three other arbitration cases in which the firm was a party. Morgan Stanley, which won a substantial portion of at least one of those awards, did not contest the decisions in the other matters.

Read full story here

 

 

Why some brokers stand by commissions?

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Thanks to Mason Braswell for taking his time to write a useful piece of article on brokers in investmentnews.com.

LPL adviser Sharon Joseph of Joseph Financial Partners knows she could make more money if she moved her clients onto a fee-based platform with a recurring annual charge of around 1%, but after three decades in the industry, she said that the math doesn’t add up for her clients.

She said that for her approximately 700 clients, all of whom have assets below $2 million, a commission-based model works best.

“I am not afraid of much, and certainly not afraid of the way my pay would change if I moved to fee-based,” Ms. Joseph said. “I stay commission-based because it is the right thing for my clients.”

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That puts Ms. Joseph, whose firm manages around $163 million in assets, in the minority of advisers. For more than a decade, firms such as LPL Financial have been encouraging advisers to go fee-based, meaning that they derive a majority of their business from charging clients around 1% to 2% of assets under management annually. Around 57% of all advisers are fee-based, according to the most recent Cerulli Associates data from 2013.

Meanwhile, broker-dealers continue to push for more fee-based business. Morgan Stanley Wealth Management, which reported it had around $724 billion — or 37% — of assets under management in fee-based accounts as of the end of March, has said that number could rise to around $1 trillion if growth continues at a similar pace.

Firms market fee-based accounts as more transparent and having less conflicts of interest than charging on each transaction, but in reality there is a lot of gray area around what makes sense for the client, said Brian Hamburger, president and chief executive of MarketCounsel, a legal and regulatory consulting firm focused on registered investment advisers.

“We have a tendency to look at this as black and white as commissions are wonderful, or commissions are evil; fees are wonderful, or fees are evil,” he said. “But when you peel back, you start to see the reasons they look at it differently is because clients have different needs.”

CRUNCHING THE NUMBERS

From an expense standpoint, it might be hard to justify a fee-based relationship on a smaller portfolio, such as those Ms. Joseph manages, or on a long-term retirement investment that does not require frequent changes.

The compounding effect of a 1% annual wrap fee on a $1 million retirement account over 20 years is more damaging than an upfront commission and a quarterly 12b-1 marketing, or “revenue sharing,” fee that usually runs around 25 basis points, or .025% of assets, Ms. Joseph argued.

She said she put one of her wealthiest clients who sold a small business for around $2 million into a well-known fund family with a low expense ratio that will allow her to shuffle assets around different funds in the family free of charge.

“Except for capital gains tax, they’ll have no other sales charge for the rest of their life,” she said.

If she had charged a fee on those assets as well, it would have taken out another 1% to 2% of their annual return in addition to the fund’s annual operating expenses.

Overall, around 49% of Joseph Financial Partners’ assets are in mutual funds; 38% is in insurance and annuities and another 13% is in brokerage.

Still, the math can be complicated and depends on what is being offered, said Ned Van Riper, a former financial adviser who now counsels advisers going independent through his firm, Finetooth Consulting.

Click here to read full article

 

 

Venture-Capital Banking Deals of The Day; Tech Start-Ups Score Funding

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BrokerDealer.com blog update:

Raising venture capital and securing start-up funding is in full swing in this year-round season as 3 more early-stage firms raised $50 million in financing this week courtesy of leading venture-capital firms Sequoia Capital, Greylock Partners, and tech titan Salesforce.com.

Cincinnati-based Lisner Inc., which specializes in audio-beacon technology and embeds tones inaudible to the human ear into digital media, received $3.5mil in funding from Boston-based Progress Ventures, Jump Capital, CincyTech, Serra Ventures and Mercury Fund of Texas. The company expects to have $1mil-$2mil of revenue this year.

Skyhigh Networks scored $40mil to fund growth for its IT service that detects, identifies, scores and controls cloud services..

Yik Yak, best known as a gossip-sharing app that lets users post anonymously to forums raised $10mil